Realty Check

Congratulations America, We're All Landlords Now

Yep, thanks to a new program announced by the nation's largest owner of home loans, Fannie Mae , troubled borrowers can sign over the deed of their homes and rent back for the current market rate.

It's called "Deed for Lease," and Fannie VP Jay Ryan calls it "an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications."

It's a deed in lieu of foreclosure is what it is.

It's only for owner-occupants, and they must be released from all second liens, which by the way is easier said than done these days, as home equity lenders are taking a tougher stand on getting something in all the distressed deal-making.

Borrowers have to prove that the new market rental rate is no more than 31 percent of their gross income; that of course so we make sure they actually pay the rent.

"This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities," adds Ryan in the press release.

So what are we talking about in numbers here? In the first half of this year Fannie Mae took about 57,000 homes into foreclosures as REOs. In the same period they did about 1200 deed-in-lieu of foreclosures, but those borrowers didn't rent the homes back. A deed in lieu, by the way, is far less detrimental to your credit rating than a foreclosure, but borrowers don't like to do that as much because they want to hold out in the house as long as they can.

Fannie's delinquency rate in September was 4.45 percent on its $792.6 billion portfolio (Sept., 2009).

But what does it say about the market to hear that Fannie is doing this?

It says the lenders can't and don't want to sell these properties back on the open market because at current home values they'll lose and lose big. By renting, they're at least getting some income back and perhaps not taking additional writedowns on top of the initial writedowns when they get a sale price lower than expected. They also don't have to deal with the trouble of getting the real estate agent and marketing the home, as well as upkeep.

But as landlords of thousands and thousands of properties, how exactly are they going to provide the maintenance that is required? How are they going to keep track of all these homes they own? A Fannie spokesman tells me they will hire property management companies, so I guess the positive there is that you're creating some jobs, right?

More and more I'm hearing of borrowers who are many many months in default on their loans but who are still living free and easy in the homes because the banks just haven't gotten to them yet (there's a question in there of course as to whether the banks even want to get to them). Remember the real estate agent from my "Lunacy in Las Vegas" post? Perhaps this program will give the lenders more incentive to go after these borrowers.

Questions?  Comments?